MEMBER DIARY

The Federal Reserve’s New Duel Mandate

As if the first duel mandate wasn't bad enough

“The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy’s long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices and moderate long-term interest rates.” -1977 Addition to the Federal Reserve Act.

While the phrase duel mandate has been coined (unlike our money), the Fed actually has a triple mandate. Now, the Fed never does what is best for the economy because central planning does not work due to inefficiencies only the price-signal system of the free market can solve. This is proven by the Fed’s boom-bust cycles creating unemployment, inflation making prices rise, and interest rates that are not based on the real pool of savings; and moderate is subjective.

But apparently 3 mandates destined to fail wasn’t enough, Chairman Bernanke is enthusiastically supporting two new goals: financing U.S. deficits and continuing to prop up the housing bubble.

Keynes would be very pleased. After all, we know we must deficit spend until the economy improves. We know that bubbles cannot be allowed to deflate. Falling prices=bad.

I am being sarcastic. By creating a market in which primary treasury bond purchasers are the middlemen, the Fed is effectively financing our debt. The real demand isn’t there anymore. Our second crash is being postponed, but only going to be worse the longer this madness goes on. Compounding the problem, this is all being payed for by newly created money.

Massive purchases of mortgages, also bought using newly created money, are destructive as well. As long as we keep resources tied up in the housing sector that wouldn’t normally be there, we are subsidizing stagnation. Keeping prices high doesn’t help anyone I know of. Keynesians believe in that fallacy so much, that some have even suggested destroying houses to prop up prices, instead of making use of our (mal) investments.

Let’s review, the Federal Reserve is:

Making our debt cliff worse

Perpetuating the housing bubble

Creating billions in new money out of thin air

For all of the talk about taxes, regulations, and unions, which are of course legitimate, it’s a shame this one is scarcely mentioned.

Click for an interactive chart on the Federal Reserve’s Balance Sheet. (Thanks to the Cleveland Fed)